The Fourth Circuit ultimately found that the Bankruptcy Court did not abuse it's discretion. The Bankruptcy Court concluded that the Debtor's decision to file for bankruptcy did not rise to the level of bad faith and there was no cause to dismiss the case under 11 U.S.C § 707(a).

Procedural context:

This appeal stemmed from the Bankruptcy Court denying creditors motion to dismiss under 11 U.S.C. § 707(a). and the District Court affirming the Bankruptcy Court's ruling .

Facts:

Prior to the Debtor filing Chapter 7, the Creditor, the receiver appointed in a pending lawsuit, obtained a judgment against the Debtor in the amount of $1.275 million in damages relating to the victims of a multibillion-dollar Ponzi scheme. Settlement between the parties was futile. The Debtor ultimately filed for Chapter 7 bankruptcy protection. At the time of filing, Debtor had assets in excess of $5.348 million. Of these assets, the only assets that were subject to administration of the Chapter 7 Trustee were one car and two boats. These assets were immediately turned over to the Chapter 7 Trustee to be administered. The unsecured debts of Debtor were comprised of the $1.275 million judgment and $150,000 in unpaid legal fees. Debtor's monthly expenses primarily consist of $12,000.00 in medical related costs for his wife who was incapacitated and in need of extensive care and a $1,000.00 recreation expense associated with the boat that he turned over to the Trustee. The Debtor's expenses exceeded his monthly income by $350.00. Debtor's household income consists of his retirement from the State Department pension plan, two rental properties, social security, and long-term disability. Creditor moved to dismiss the Debtor's bankruptcy case under 11 U.S.C. § 707(a) on the ground that Debtor had abused the bankruptcy process to avoid Creditor's judgment. The motion to dismiss was denied by the Bankruptcy Court. The Bankruptcy Court evaluated the facts to determine whether the assertions of bad faith rose to the level of "cause" to dismiss Debtor's bankruptcy case pursuant to 11 U.S.C. § 707(a) . The Bankruptcy Court looked to the "totality of the circumstances" approach and relied upon the eleven bad-faith factors set forth in McDow v. Smith, 295 B.R. 69 (Bankr. E.D. Va. 2003). The Bankruptcy Court carefully weighed the Debtors motivating factors in filing for bankruptcy protection. The Bankruptcy Court concluded that although the judgment may have been the primary motivating factor, other factors played a significant role in denying the motion to dismiss. One consideration was the Debtor's wife. She was suffering from a serious medical condition which prevented her from working and there were significant monthly medical costs. Other considerations by the Court were the fact that the Debtor was very compliant and cooperative with the administration of the estate; the Debtor's lifestyle was comfortable and not exorbitant; the actions of the parties regarding the litigation and settlement discussions prior to the bankruptcy filing; and the value the Debtor's exempt assets and the legal and equitable protections afforded the assets; The Fourth Circuit acknowledged that bad faith may constitute “cause” under § 707(a) and also recognized that the bar for finding bad faith is a high one and the remedy of dismissal should be reserved for cases of real misconduct. However, the Fourth Circuit found no abuse of discretion and the Fourth Circuit accordingly affirmed the Bankruptcy Court's and District Court's rulings.

Judge(s):

Judge Wilkinson wrote the opinion, in which Chief Judge Gregory and Judge Harris joined